Define fixed cost. Give an example. Explain with reason the behaviour of Average Fixed Cost as output is increased.

Solution

Fixed cost is the sum of all expenditures incurred to acquire a fixed asset. It does not change with an increase or decrease in the amount of goods or services produced or sold. Like - Purchase of plant & machinery.
Average fixed cost is the fixed cost per unit of output. Average fixed cost curve slopes downward to the right. It shows that AFC decreases as output increases. It is a rectangular hyperbola curve. It means that the product of AFC and output is equal to TFC which remains constant at all levels of output.
TFC = AFC * Q
Therefore,

AFC space equals space TFC over straight Q

Some More Questions From Production And Costs Chapter

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Production And Costs

Define fixed cost. Give an example. Explain with reason the behaviour of Average Fixed Cost as output is increased.

Some More Questions From Production And Costs Chapter

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What is the shape of supply curve during very short (market period)?

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